Tuesday, June 14, 2016

Nottingham Forest have enjoyed a glorious past, albeit
largely relating to one magical period under the legendary Brian Clough and his
assistant Peter Taylor. After gaining promotion from the old Second Division in
1977, Clough’s Forest become Division One champions at the first time of asking
in 1978 and then proceeded to win the European Cup two years in succession. In
the same purple patch, they also picked up two League Cups.

This was a remarkable achievement for a club of Forest’s
size and was testament to the genius of the manager, as the team featured few
superstars. These successes have been wonderfully chronicled in the superlative
documentary and book, “I Believe In Miracles”, which is well worth the
attention of any football fan.

However, recent history has not been so kind. Next season
will be the 18th that Forest have spent outside the Premier League, which is a
shocking indictment for a club that once scaled the heights . Chairman Fawaz Al
Hasawi agreed with this downbeat assessment in his review of the 2014/15
season, which he described as “a time of missed opportunity”.

The Al Hasawi family purchased the club in July 2012 from
the estate of former owner and lifelong fan, Nigel Doughty, after his sad and
premature death. Initially, the Kuwaiti businessmen talked a good match, “We
know there are challenging times ahead of us to bring the club back to its
glory days and we look forward with excitement towards a new successful future.”

"Until I learn to accept my Jamie Ward"

The new owners were also boosted by Doughty’s estate only
taking a £20 million repayment against the outstanding £86 million of loans,
thus enabling the club to move forward with a relatively clean slate.

However, it is fair to say that the Al Hasawi era has not
been a glittering success. While it is true that they have made a substantial
investment into the club, amounting to £67 million of loans as at 31 May 2015, Forest
are no nearer securing a return to the top flight, as they continue to struggle
in the Championship.

Indeed, one damning statistic is that their league position
has deteriorated every season under Al Hasawi: 8th in 2012/13, 11th in 2013/14,
14th in 2014/15 and 16th in 2015/16. In other words, they are now closer to League
One than the Premier League, which is particularly disappointing, given that
they reached the play-offs two seasons in a row as recently as 2009/10 and
2010/11.

The constant managerial upheaval surely cannot have helped
matters. In the four years since the new owners took charge, Forest have had no
fewer than eight people coaching the team, despite Al Hasawi claiming, “I don’t
like to change managers. I like stability.”

"Do your best and don't worry"

They started as they meant to go on, i.e. shambolically, with
four different managers in their first six months, as noted in a magnificent
paragraph in the 2012/13 accounts: “The year started with Steve Cotterill as
football manager. He was replaced in July 2012 by Sean O’Driscoll, who himself
was replaced in December 2012 by Alex McLeish. Alex was only in the position
until February 2013, when he was replaced by the current manager Billy Davies.”
And breathe.

After alienating most people with his somewhat abrasive
style, Davies was sacked after a year with Gary Brazil taking the role on a
caretaker basis (though arguably that’s the only valid description of the
position), before the arrival of fans’ favourite Stuart Pearce. After a
promising start, the team’s form collapsed, so “Psycho” also failed to last a
season.

Next on the chopping block was another former Forest player,
Dougie Freedman, though he was given his P45 in the dreaded February/March period
with coach Paul Williams stepping up to the plate until the end of the season.
Incredibly, Forest are currently without a manager, though many would understandably
think twice before accepting this poisoned chalice.

There has been similar turnover in the important Head of
Recruitment role, while the brief experiment with an experienced chief
executive ended with the resignation of Paul Faulkner, after the former Aston
Villa man claimed that he was not allowed to do his job.

The owners’ strategy has essentially been to throw money at
the problem, resulting in much higher wage bills and increasing debt. To be
fair, the issue has not so much been a lack of investment, but the seeming
absence of any sort of strategic plan, which has resulted in the money being
largely wasted.

"Vaughan in a storm"

This impression has been reinforced by numerous financial
glitches, including late payments to suppliers, failures to pay football clubs
transfer fee installments (e.g. to Peterborough United for striker Britt
Assombalonga) and five (yes, five) winding-up orders, including two this year
alone for non-payment of tax.

Although the club described these problems as “purely
administrative”, this sort of incompetence is never a good sign. One reason offered
for slow payment of wages was “a national holiday in Kuwait”, which is only one
step above “the dog ate my homework”.

Even if Al Hasawi wanted to spend more on the club, he would
not have been able to do so, as the club’s losses resulted in Forest breaching
the Financial Fair Play (FFP) regulations, thus being placed under a transfer
embargo in December 2014.

This catalogue of woe means that it is not overly surprising
that the owners are looking for others to come on board. Indeed, there are
strong rumours that Greek shipping magnate Evangelos Marinakis, the owner of Olympiacos
Piraeus, is poised to buy 80% of Forest.

Although Forest might seem like an attractive proposition,
any new investor would discover a club in a fairly poor financial position, as
seen by the 2014/15 accounts, which featured a loss of £21.5 million.

This actually represented a £2.5 million improvement over
the previous season’s £24.0 million loss, though that included a £1.1 million
restatement following the cancellation of a sponsorship agreement with the Al Hasawi
family (for the shirt and areas around the City Ground).

The main reason for the lower loss was a £4.3 million
increase in profit on player sales to £6.1 million, largely due to the sales of
Jamaal Lascelles and Karl Darlow to Newcastle United.

Revenue also rose by £2.1 million (14%) to £17.4 million,
which Al Hasawi ascribed to “the dedication of the supporters and the work of
the commercial department”. This was reflected in match day income increasing
by £1.0 million (14%) to £8.2 million and commercial income rising by £0.5
million (18%) to £3.1 million.

However, another important factor was income from player
loans climbing £1.0 million to £1.5 million, as a remarkable 12 players were
loaned out, including Radoslaw Majewski, Jamie Mackie, Greg Halford, Dan
Harding and Djamel Habdoun (amongst others). On the other hand, broadcasting
income dropped by £0.4 million (8%) to £4.6 million.

There was another “significant increase” in the wage bill,
which rose £2.5 million (9%) from £27.2 million to £29.7 million, while player
amortisation was up £0.7 million (13%) to £6.4 million. Other expenses slightly
increased to £8.2 million, while interest payable was £0.5 million worse, as
the previous year included a credit after interest previously charged by the
holding company had been waived.

Despite the improvement to the bottom line, only two
Championship clubs reported larger losses than Forest in 2014/15, namely Bournemouth
£39 million and Fulham £27 million. In fairness, hardly any clubs are
profitable in the Championship with only six making money in 2014/15 – and most
of those are due to special factors.

Ipswich Town were top of the pops with £5 million, but that included
£12 million profit on player sales. Cardiff’s £4 million was boosted by £26
million credits from their owner writing-off some loans and accrued interest.
Reading’s £3 million was largely due to an £11 million revaluation of land
around their stadium. Birmingham City and Wolverhampton Wanderers both made £1
million, but were helped by £10 million of parachute payments apiece.

So the only club to make money without the benefit of
once-off positives were Rotherham United, who basically just broke even – and
ended up avoiding relegation to League One by a single place.

Of course, losses are nothing new for Forest, as the last
time they made a profit was back in 2005 – and that was only £1.1 million.
Since then the club has suffered a decade of losses, amounting to an extraordinary £126 million.

This was all meant to change with the arrival of the Al
Hasawi family: “From the club’s perspective the new ownership represented the
end of a period of uncertainty and has allowed the club to once again stabilize
its finances.”

In reality, the deficits have increased with £63 million of
losses being accumulated in the last three years, averaging £21 million a
season. This is more than double the average annual loss of £9 million over the
preceding seven seasons.

As we have seen, part of the 2014/15 improvement was due to
profits made from player sales. These can have a major impact on a football
club’s bottom line, but it’s not an enormous money-spinner outside the Premier
League with the most profit made by Norwich City £14 million, followed by
Ipswich £12 million, Leeds United £10 million and Cardiff City £10 million.

Forest made £6 million from this activity, which was boosted
by the way that player values are accounted, as the major sales (Lascelles and
Darlow) were both homegrown products, so had no value on the balance sheet (as
no transfer fees had been paid). Against that, the club would have absorbed
losses for the large number of players released on free transfers.

Over the years, Forest have made very little money from
player sales. In fact, the last time that they registered a profit above £2.5
million from this activity (before last season) was 2005, when the £5.1 million
(plus an exceptional £1.5 million gain on finance leases) helped produce the
club’s last overall surplus.

In the nine years between 2005 and 2015, the club only
generated a total of £11.5 million profits from player sales, i.e. just £1.3
million a season. In some cases, this can be considered a positive, as it means
that a club is retaining its best players, but here it is more likely to be
because Forest have not had many players that others clubs would want to buy.

There are a few signs that this might be changing, as the
2015/16 accounts will be boosted by the £7 million sale of Michail Antonio to
West Ham, though accounting losses will also be incurred for the release of the
likes of Jamie Mackie. In financial terms, this might be seen as “running to
stand still”, as the reasonably good profits from player sales in 2014/15 did
not prevent a thumping great overall loss.

This is because Forest’s underlying profitability is getting
worse. Most clubs use EBITDA (Earnings Before Interest, Depreciation and
Amortisation) as an indicator of financial health, as this strips out once-off
profits from player trading and non-cash items. This has been consistently
negative at Forest, but has plummeted from minus £2 million in 2005 to minus
£20 million in 2015.

This was one of the worst in the Championship, only better
than Bournemouth, whose minus £25 million was heavily influenced by large
promotion bonuses. In real terms, Forest had the lowest EBITDA, which means
that they are the least profitable club in the division.

To be fair, only three clubs had a positive EBITDA in the
2014/15 Championship (Wolves, Birmingham City and Rotherham) and none of those
clubs generated more than £1.5 million. In stark contrast, in the Premier
League only one club (QPR) reported a negative EBITDA, which is testament to
the earning power in the top flight.

Revenue has only grown by £2.8 million (19%) in the three
seasons since Al Hasawi arrived and even that is a bit misleading, as it
includes £1.5 million of player loans income. This has only been included as
gross income since 2013, as it had previously been netted off against expenses.

Excluding the effect of this accounting restatement, the
real revenue growth is just £1.2 million (8%), which is a long way from the
increases implied by the owners’ 3-5 year plan.

Part of the problem was actually highlighted by the club in
the 2012 accounts, as it explained one of the reasons for the revenue reduction
that year as being “the lower performance of the first team”.

Even after the rise in Forest’s income to £17.4 million,
this is still on the low side and clearly bottom half of the table in the 2014/15
Championship. Although Blackpool and Bolton Wanderers are yet to publish their
accounts, we can safely say that their revenue was higher than Forest, as they
both received £10 million parachute payments.

Therefore, Forest only had the 16th highest revenue in the
Championship, only above eight clubs, though one of these (Bournemouth) did
manage to get promoted. To further place this into perspective, four clubs
enjoyed revenue higher than £35 million (more than twice as much as Forest):
Norwich City £52 million, Fulham £42 million, Cardiff City £40 million and
Reading £35 million.

Of course, these revenue figures are distorted by the
parachute payments made to those clubs relegated from the Premier League, e.g.
in 2014/15 this was worth £25 million in the first year of relegation.

However, if we were to exclude this disparity, Forest would
still find themselves back in tenth place. The revenue differentials would be
smaller, though they would be behind different clubs, e.g. the top three would
then be Norwich City £29 million, Leeds United £24 million and Brighton and
Hove Albion £24 million.

The most important revenue stream for Forest is match day,
which contributes 47% of total revenue, followed by broadcasting 26% and
commercial 18%. Player loans accounted for as much as 9% of 2014/15 revenue.

In fact, no club has a greater reliance on match day revenue
in the Championship than Forest’s 47%, ahead of Charlton Athletic 43%, Brighton
and Hove Albion 42%, Millwall 41% and Ipswich Town 40%.

Forest’s match day revenue actually rose by £1.0 million
(14%) to £8.2 million in 2014/15, even though they hosted four fewer cup games,
as the average attendance increased from 22,630 to 23,492, largely due to
having Forest legend Pearce at the helm.

This meant that Forest’s match day revenue was the fourth
highest in the Championship, only behind Norwich City £10.7 million, Brighton
£9.8 million and Leeds United £8.8 million.

In terms of attendance, it was a similar story, as Forest
were the fifth highest, though it would have been somewhat galling to see that
the league leaders were local rivals Derby County with 29,232.

However, to add to Forest’s concerns, attendances fell by a
massive 3,800 (16%) in 2015/16 to 19,676, even though season ticket prices were
frozen, due to a combination of several factors: unhappiness with the owners, the poor football
on display and high ticket prices.

Whatever the reasons, this is the first time that
attendances have dipped below 20,000 since the club was in League One in
2007/08, which is clearly bad news, given how important gate receipts are to
Forest’s business model.

Indeed, Forest have decided to cut ticket prices by 5% for
the 2016/17 season with Al Hasawi explaining the rationale thus, “With loyal
supporters making a financial commitment to support this club I feel it is our
duty to extend the (early bird) offer.” Fair enough, but it could just as easily
be a straightforward acknowledgment of the need to do something to prevent the
crowds falling any further.

Of course, in the Premier League, the vast majority of all
but the elite clubs’ income is derived from broadcasting, but this is not the
case in the Championship. Here, most clubs receive just £4 million of central
distributions, regardless of where they finish in the league, comprising £1.7
million from the Football League pool and a £2.3 million solidarity payment
from the Premier League.

However, the clear importance of parachute payments is once
again highlighted in this revenue stream, greatly influencing the top eight
earners, though it should be noted that clubs receiving parachute payments do
not also receive solidarity payments.

Nevertheless, it should be noted that these payments are not
a panacea, so Middlesbrough secured promotion last season, even though their
broadcasting income of £6.2 million in 2014/15 was less than half the size of
those clubs boosted by parachutes.

Looking at the television distributions in the top flight,
the massive financial chasm between England’s top two leagues becomes evident
with Premier League clubs receiving between £67 million and £101 million,
compared to the £4 million in the Championship. In other words, it would take a
Championship club more than 15 years to earn the same amount as the bottom
placed club in the Premier League.

The size of the prize goes a long way towards explaining the
loss-making behaviour of many Championship clubs and to some extent justifies
Forest’s profligacy. This is even more the case with the astonishing new TV
deal that starts in 2016/17, which will be worth an additional £30-50 million a
year to each club depending on where they finish in the table.

As an example, I have (conservatively) estimated that the
club finishing bottom in the Premier League next season will receive £92
million, which is £87 million more than a Championship club not receiving
parachute payments. Forest might well be a big club, but the TV deals in the
Premier League have risen to stratospheric levels since they last graced the
top flight, so they now have to compete against the realities of the modern
footballing world.

From 2016/17 parachute payments will be even higher, though
clubs will only receive these for three seasons after relegation. My estimate
is £75 million, based on the percentages advised by the Premier League (year 1
– £35 million, year 2 – £28 million and year 3 – £11 million). Up to now, these
have been worth £65 million over four years: year 1 – £25 million, year 2 – £20
million and £10 million in each of years 3 and 4.

There are some arguments in favour of these payments, namely
that it encourages clubs promoted to the Premier League to invest to compete,
safe in the knowledge that if the worst happens and they do end up relegated at
the end of the season, then there is a safety net. However, they do undoubtedly
create a significant revenue disadvantage in the Championship for clubs like
Forest.

Surprisingly for a club of Forest’s admirable tradition,
their commercial income of £3.1 million, up from £2.6 million the previous
season, was one of the smallest in the Championship in 2014/15, way behind
Norwich City £12.8 million, Leeds United £11.3 million and Brighton £8.9
million. In fact, it was only ahead of four clubs: Charlton Athletic £2.5
million, Brentford £2.4 million, Millwall £1.9 million and Wigan £1.5 million.

Forest’s commercial income is made up of sponsorship,
royalties and advertising £0.8 million, match day hospitality, events and
catering £1.8 million and merchandising £0.6 million.

One of the reasons for Forest’s low commercial revenue is
their merchandising deal with Kitbag, though this ended in June 2015, so next
year’s accounts should see some upside. That said, there is considerable room
for improvement in the commercial arena when you consider that local Midlands
rivals, Derby County and Wolves, both generate around £8 million a year from
this activity.

"Shout, shout, let it all out"

For the past three seasons Forest’s shirt has been
emblazoned with the name of one of the owner’s companies, namely Fawaz
Refrigeration & Air Conditioning. Although the chairman described this as a
“lucrative” deal, he did admit that he would have preferred to secure an
external sponsor, and he has now done so. From the 2016/17 season, Forest will
have online betting firm 888 Sport as its shirt sponsor.

It remains to be seen whether some of the sponsorship areas
around the stadium will be continued to be utilised by companies controlled by
the Al Hasawi family at no charge. Either way, it feels a long way from the
days when Fawaz claimed that Forest’s revenue issues would be addressed in the
form of new sponsorship from several companies in Kuwait.

The current three-year kit supplier partnership with Adidas
runs until the end of the 2016/17 season.

Forest’s wage bill rose by 9% (£3 million) from £27 million
to £30 million in 2014/15, which means that wages have increased by a
staggering 69% (£12 million) in the three years since Al Hasawi arrived, while
revenue only grew by 19% (£3 million) in the same period, thus pushing the
wages to turnover ratio up to an awful 170%.

As the club observed, “the owners gave significant support
to football management in an effort to support the promotion bid.” In a way,
that is laudable, though it is unclear how much is included in the wage bill
for pay-offs to all the sacked managers (and their backroom staff).

This is the price Forest have paid for their frequent
changes at the top, perhaps the worst example being Billy Davies being sacked
just six months after being awarded a four-year contract.

In any case, the last time that Forest had a wages to
turnover ratio below 100% was back in 2009. Of course, wages to turnover
invariably looks terrible in the Championship with no fewer than 10 clubs
“boasting” a ratio above 100%, but Forest’s 170% was the third highest (worst),
only behind Bournemouth 237% and Brentford 178%.

Given that, it might come as something of a surprise then to
see that Forest’s wage bill of £30 million was actually only the seventh
highest in the Championship, behind Norwich City £51 million, Cardiff City £42 million,
Fulham £37 million, Reading £33 million, Bournemouth £30 million and Blackburn
Rovers £30 million – though it was almost £10 million more than Watford, who
were promoted that season.

Stop me if you’ve heard this before, but this was once again
because most of these clubs enjoyed the benefit of parachute payments. If we
look at clubs who did not receive such payments, then Forest had the second highest
wage bill, only £700k behind Bournemouth, whose wages were significantly inflated
by substantial promotion bonus payments, but £8 million above Derby County. In other words, Forest's wages were effectively the highest of any club not receiving parachute payments - and by some distance.

It is likely that the wage bill will fall in 2015/16
following the departure of some high earners (andlower termination pay-offs), but it will
still be a real challenge for the club to control this while giving themselves
the best chance of promotion.

Another aspect of player costs that has been steadily rising
at Forest is player amortisation, which is the method that football clubs use
to expense transfer fees. In line with the higher sums spent on bringing
players into the club, player amortisation has grown under the current
ownership from £2.5 million in 2012 to £6.4 million in 2015.

As a reminder of how this works, transfer fees are not fully
expensed in the year a player is purchased, but the cost is written-off evenly
over the length of the player’s contract via player amortisation. As an
illustration, if Forest were to pay £5 million for a new player with a
five-year contract, the annual expense would only be £1 million (£5 million
divided by 5 years) in player amortisation (on top of wages).

Although Forest’s player amortisation might not seem a huge
charge, it was actually the fourth highest in the Championship, only surpassed
by those clubs relegated from the Premier League in recent times, i.e. Norwich
City, Cardiff City and Fulham. Of course, this expense should have come down in
2015/16 following the transfer embargo and release of many players.

The other side of that coin is that player values on the
balance sheet have also increased, more or less tripling from £3.1 million in
2012 to £9.2 million in 2015. That is the accounting value in the books, but
the actual market value would obviously be much higher if Forest were to sell
any of its players, as homegrown players have zero value in the accounts.

It will not have escaped the supporters’ attention that the
performances on the pitch have actually worsened as both wages and player
values have increased, which is not how these things generally work. As The
Blow Monkeys once sang, “It doesn’t have to be this way.”

In fairness to Al Hasawi, one thing that he cannot be
accused of is failing to back his managers in the transfer market. Even with
the impact of the transfer embargo, Forest have made gross purchases of £23
million in his four seasons, compared to only £9 million in the preceding four
seasons.

On the other hand, there has also been an increase in player
sales from virtually nothing between 2008 and 2012 to £17 million in the last
four years, so net spend has overall decreased.

Clearly, Forest have had to act smarter since the embargo
was put in place, so they have made some astute free signings such as Matt
Mills, Jamie Ward and Daniel Pinillos. They have also dipped into the loan
market with good contributions from the likes of Nelson Oliveira, Ryan Mendes,
Bojan Jokic and Gary Gardner.

As a result of the transfers of Antonio, Lascelles and
Darlow, Forest had £4 million of net sales over the last two seasons. This
meant that they were comfortably outspent by the likes of Derby County £29
million, Middlesbrough £23 million and Burnley £14 million.

In fact, the two automatically promoted clubs and the four
that qualified for the play-offs filled six of the seven top places in the net
spend league, which underlines how much Forest have been hit by the transfer
embargo, so it is good news that the chairman has confirmed this has recently
been lifted (though there is nothing to this effect on the Football League
website).

Forest’s net debt significantly increased in 2015 from £52.0
million to £82.1 million, as gross debt rose by £29.5 million from £52.6
million to £82.2 million and cash fell £0.5 million from £0.6 million to just
£0.1 million.

Virtually all of the debt is owed to the club’s owner, either
directly to the Al Hasawi family (£67 million) or indirectly via the loan from
the parent company, NFFC Group Holdings Limited, £14.9 million. No interest is
charged on these loans, which are only repayable when the club “is in a
position to do so”, so this could therefore be considered “soft” debt. Other football club owners have gone a stage further by converting much of their debt into
equity, though last month Al Hasawi did convert £8 million into capital.

Indeed, after the takeover the estate of Nigel Doughty
allowed £66 million of their outstanding debt to be capitalised. As the club said,
that represented a “considerable and significant improvement to the balance
sheet.” The remaining balance of £20 million was repaid using funds provided by
the parent company. However, just three years later, Forest’s debt is back up
to the pre-capitalisation levels.

Forest’s was by no means the largest debt in the Championship,
being lower than six other clubs. In fact, four clubs had debt over £100
million, including Brighton £148 million, Cardiff City £116 million and
Blackburn Rovers £104 million. Bolton Wanderers have not yet published their
2015 accounts, given their much-publicised problems, but their debt was a
horrific £195 million in 2014.

That said, the vast majority of this debt is provided by
owners and is interest-free, so the amounts paid out by Championship clubs in
interest is a lot less than you might imagine.

In addition to the financial debt, Forest owed £2 million in
transfer fees, while they also had quite high contingent liabilities of £6.6
million, up from £4.3 million, for player purchases and first team management
changes.

The accounts state that the club “relies on the continued
support of the Al Hasawi family for its day to day funding and funds its
working capital requirements through a facility provided by the Al Hasawi
family.” This is clearly seen in the 2015 cash flow statement.

Even after adding back non-cash items such as player
amortisation and depreciation, then adjusting for working capital movements, Forest
made a substantial cash loss from operating activities of £23.9 million. They
then spent a net £5.7 million on player recruitment and £0.5 million on capital
expenditure. This was funded by an additional £29.7 million loan from Al Hasawi.

One other point worth noting is the increase in creditors in
2013 and 2014, which meant that the club was effectively funding some of its
expenditure by the old trick of paying suppliers later.

Of course, it is nothing new for Forest to rely on their
owner for financial support, as it was much the same story under Doughty with
the only real source of funds being additional shareholder loans. In fact,
since 2005 around £127 million has been provided by the club’s owners with
almost 70% (£88 million) of that money being used purely to cover operating
losses.

Only £14 million was used for player purchases (net), while
over £18 million went on sorting out the finances: reduction in overdraft £9.8
million, loan repayments £6.7 million and interest payments £1.8 million.

What is striking is how little money (only £6.6 million) has
been spent on infrastructure investment, so there have been virtually no
improvements to the stadium or the academy. This is in stark contrast to clubs
like Brighton and Brentford where the owners have also provided ample funding,
but large amounts have been invested in their long-term future.

It is also true that there has been an increase in financial
dependency under Al Hasawi with the family needing to pump in £67 million in
just three years. As a comparison, Doughty had to stump up a similar sum (£65 million) over
the preceding eight years.

"It looks like Daniel"

As we have already noted, Forest’s 2013/14 loss meant that
they breached the Financial Fair Play regulations, resulting in a transfer
embargo. The Football League simply stated that the club had “exceeded the
maximum permitted deviation of £6 million – consisting of a maximum adjusted
loss of £3 million plus a further maximum of £3 million of shareholder
investment.”

It should be noted that FFP losses are not the same as the
published accounts, as clubs are permitted to exclude some costs, such as youth
development, community schemes, promotion-related bonuses and infrastructure
investment (such as stadium improvements and training ground). That said, this
does not really help Forest’s FFP
calculation that much, as they have spent so little in these areas.

Instead, this will remain a major issue for the owners, as
they noted in the accounts: “Preparation to meet the challenges of FFP also
adversely affected the season as management worked tirelessly behind the scenes
to thrive in the changed environment.”

That may be, but it is somewhat surprising that they took so
long to wake up to the realities of FFP, given that the 2012 accounts
explicitly stated that this “will be a challenge for the new owners.”

From the 2016/17 season the regulations will change to be
more aligned with the Premier League, so that the losses will be calculated
over a three-year period up to a maximum of £39 million, i.e. an annual average
of £13 million. This will likely encourage clubs to “go for it” even more.

"Many Happy Returns"

Any renewed spending may well be under new ownership, as Al
Hasawi has tired of the criticism: “If people are pushing and always negative,
and there is no appreciation, why should I continue? Maybe there are some
people better than me and I am doing it wrong.”

The obvious answer would be that few could do worse, but it
might be a case of “out of the frying pan and into the fire” if the rumours are
true about Olympiacos owner Evangelos Marinakis buying into the club. He is
currently banned from any “football activity” in Greece with the public
prosecutor’s dossier containing a lengthy list of allegations, including
blackmail, fraud and bribery.

In any case, Forest fans would not have seen the last of Al Hasawi,
who would like to stay on as chairman: “Whatever happens, it is not going to be
a sale of the club. I want this club to win promotion and I want to be here
when it happens.”

Even after all the misadventures on his watch, Al Hasawi is still optimistic,
“I hope this will be a positive summer, because I want to do things right. I
want this to be the time we get it right.” On the plus side, key players like
Assombalonga and Chris Cohen are returning from lengthy injuries, but the lack
of a manager does not exactly inspire confidence.Realistically, the chances ofa return to the Premier League appear further
away than ever. The Championship is a tremendously competitive league and
Forest seem ill-equipped to mount a serious challenge against those clubs
benefitting from hefty parachute payments – or even those with wealthy owners who have a good understanding of the game. Unless, of course, you do believe in miracles.

Tuesday, June 7, 2016

Wolves finished the 2015/16 Championship in an uninspiring
14th position, which was particularly disappointing for the grand old Midlands
club, as they had only just missed out on a play-off place on goal difference
the previous season.

That view was confirmed by chief executive Jez Moxey, who
described the season as “very challenging”. He added, “we’re frustrated, we’re
angry, and it’s not okay – it’s not good enough for Wolverhampton Wanderers.”

Much of the supporters’ criticism for this sad state of
affairs has been directed at the owner, Steve Morgan, whose tenure has seen an
amazing rollercoaster ride. Morgan, who made his fortune as the founder of
house builder Redrow, purchased the club in August 2007 for a nominal £10 fee
from Sir Jack Hayward, though he also had to pledge a guaranteed £30 million
investment.

This funding helped Wolves gain promotion two years later to
the Premier League, where they spent three seasons before suffering two
successive relegations to League One, though they did return to the
Championship at the first attempt with a record points total.

"Irish heartbeat"

Wolves stay in the Premier League was characterised by
financial prudence, as shown by regular profits, low wages, no debt and high
cash balances. Nothing wrong with a sensible financial strategy, of course, but
in the unforgiving world of modern football, where money talks loudest, it was
also a gamble that ultimately failed to pay off, leading to the club falling
into what Moxey called a “tailspin”.

Wolves’ prospects were not helped by some bizarre
recruitment decisions. First, Mick McCarthy, a manager who had seemed
completely in tune with the Morgan/Moxey ethos, was dismissed after a poor run
of form, only to be replaced by his inexperienced assistant Terry Connor, who
failed to prevent relegation to the Championship.

Wolves then hired the Norwegian Stale Solbakken, who might
have been an imaginative choice, but the poor results continued, so his reign
lasted only six months. His replacement was former Welsh international Dean
Saunders, who saw his side relegated to the third tier for the first time since
1985, whereupon his contract was terminated.

Finally, a safe pair of hands was secured in the shape of
Kenny Jackett, who has been head coach since May 2013, and succeeded in guiding
Wolves back to the Championship.

"God put a smile on my face"

In fairness to Morgan, he did set out his stall early doors
after he made the investment into the club, “Although this is a significant
amount of money, there will not be an ‘open cheque book’ approach to signing
players. Instead the club will build on the current strategy of steadily and
progressively developing a team of young, hungry and talented players.”

Financial stability has been the mantra with Morgan
lecturing others on their cavalier approach: “We have tried to manage this as a
proper business and I wish other clubs would do the same.” That’s all well and
good, but many fans have wondered whether things would have gone differently if
the club had made more use of its “very healthy financial position” when in the
top flight. Ironically, some of the subjects of Morgan’s scorn are still in the
Premier League and are now coining it from the ever-increasing TV deals.

Similarly, the lack of investment in the playing squad last
summer meant that Wolves did not maintain the momentum built up over the past
two seasons and left them languishing in the lower half of the Championship.

"Dominic dancing"

Moxey has said that the club’s priority is to get back to
the Premier League, then “recharge the finances of the business and stay in
there”, but very few clubs are capable of doing this without pushing the boat
out a little. It’s true to say that Burnley have managed to achieve this feat,
but they are the exception to the rule.

Instead, Wolves have focused on the development of their
“young players, who are seen as the future lifeblood of the club.” This can
work from two perspectives: either the players can make valuable contributions
to the first team squad; or they can improve the bank balance if sold to others
for good money.

This is an admirable approach, but one that is tough to
execute well in the intensely competitive Championship, which is a natural
domain for hard-bitten, old professionals.

It also seems unlikely that Wolves will “go for it” next
season, given that Morgan put his 100% shareholding in the club up for sale
last September. Although he was keen to observe that his “ongoing commitment
and financial support to Wolves” would continue until a new owner is found, it
is difficult to see him funding a big outlay in the transfer market.

Wolves’ desire to balance the books was once again seen in
their 2014/15 accounts, which registered a £0.7 million profit, though this was
£7.8 million lower than the previous season’s £8.5 million profit, largely due
to a £6.2 million (19%) reduction in revenue from £32.6 million to £26.4
million.

The main driver was a £9 million reduction in the parachute
payments from the Premier League, though this was partially offset by a £1
million increase in the distributions from the Football League following
promotion to the Championship, so there was a net £7.6 million (37%) fall in
broadcasting income from £20.6 million to £13.0 million.

The promotion impact was also seen in gains in the other
revenue streams: (a) commercial income increased by £1.0 million (16%) to £7.8
million, mainly due to sponsorship and advertising; (b) gate receipts were £0.4
million (7%) higher at £5.6 million, as attendances climbed from 20,860 to
22,423. However, profit from player sales fell by £1.3 million (35%) to £2.5
million.

The wage bill rose £1.3 million (8%) from £16.4 million to
£17.7 million, but other expenses were £0.9 million lower at £7.3 million. The
impact of exceptional items was one again felt, as there was no impairment of
player registrations (£1.0 million in the previous season), but this was
largely offset by restructuring credits, which were £0.6 million lower.

The accounts for the last three years have been majorly
impacted by the £27.5 million restructuring provision that was booked in
2012/13 following the two consecutive relegations, comprising £15 million for
onerous player contracts that were signed when the club was competing in higher
divisions and £12.5 million player impairment values.

CFO Rita Purewal explained, “The restructuring was paramount
and was an important part of our financial planning. We couldn’t carry those
costs going forward.” Moxey was at pains to note, “This is not a cash loss, but
includes necessary provisions to reflect the position we find ourselves in.”

He added, “This draws a line in the sand under the past”. In
other words, the club decided to deal with the issue in one year rather than
drip-feeding it over several years, which is fairly standard business practice.

However, it has clearly distorted the financial results,
e.g. the 2014/15 reported profit of £0.7 million would have been a £5.9 million
loss without the provision release of £6.7 million. Similarly, the 2013/14 profit
of £8.5 million would have been a £1.7 million loss without a £10.2 million
provision release. On the other hand, the massive £33.1 million loss in 2012/13
would have been only £5.6 million if the restructuring provision had not been
created.

Note: for 2013/14 I have taken the figure of a £10.2 million
provision release stated on Wolves’ website, even though it is not immediately
clear from the accounts how this is calculated. The club has not yet responded
to my request for clarification.

Where we do agree is that £2.7 million of the provision was
left on the balance sheet as at 31 May 2015, though the accounts expected that
this would be fully utilised in the next year, i.e. benefiting the 2015/16
accounts.

Wolves were one of only six profitable clubs in the
Championship in 2014/15, but almost all of these are due to special factors. As
we have seen, Wolves £1 million was boosted by a £7 million provision release,
but others also benefited from similar movements.

Ipswich Town were the most profitable with £5 million, but
that included £12 million profit on player sales. Cardiff’s £4 million was
boosted by £26 million credits from their owner writing-off some loans and
accrued interest. Reading’s £3 million was largely due to an £11 million
revaluation of land around their stadium. Birmingham City were helped by a £10
million parachute payment.

The only club to make money without the benefit of once-off
positives was Rotherham United, who basically just broke even – and ended up
avoiding relegation to League One by a single place.

However, the harsh reality is that the majority of Championship
clubs lose money with four reporting losses above £15 million: Bournemouth £39
million, Fulham £27 million, Nottingham Forest £22 million and Blackburn Rovers
£17 million. As Moxey wryly observed, “A lot of clubs spend a lot more than
they can afford.”

This is clearly not the case at Wolves. That man Moxey
again, “When Steve Morgan came in, he said… we would try to be
self-sufficient.” Obviously, relegation from the Premier League has taken its
toll with small underlying losses in the last three years (excluding the impact
of the restructuring provision movements), but Wolves more than achieved their
sustainability objective in the top flight.

In 2012 Wolves went down with a £2.2 million profit on their
books, the same as the previous year, though even these were left in the shade
by the hefty £9.1 million profit they made in 2010, their first year back.

In total, Wolves made £13.5 million of profit during their
three seasons in the Premier League, which might not sound enormous these days,
but was a rare accomplishment at the time. Fine, but the consequent relegations
bring to mind the old saying, “Penny wise, pound foolish.”

Profit from player sales can have a major impact on a
football club’s bottom line, but it’s not an enormous money-spinner outside the
Premier League with the most profit made by Norwich City £14 million, followed
by Ipswich £12 million, Leeds United £10 million and Cardiff City £10 million.

Wolves made less than £3 million from this activity in
2014/15, though this will increase to at least £10 million in the 2015/16
accounts, thanks to the sale of star striker Benik Afobe to Bournemouth for £10
million and player of the year Richard Stearman to Fulham for £2 million.

Moxey has previously indicated that the business plan
includes selling some players to recoup some money, but this has obviously
accelerated following relegation from the Premier League with £22 million
profits in the last three seasons compared to just £8 million in the preceding
three seasons.

Even though the chief executive claimed that the club did
not need to sell its best players, it still raised “considerable sums” (£15
million) in the summer of 2012, mainly from selling Steven Fletcher to
Sunderland, Matt Jarvis to West Ham and Michael Kightly to Stoke City.

To get an idea of underlying profitability, football clubs
often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation),
as this strips out player trading and non-cash movements. It is therefore
effectively cash profit-

This has been positive at Wolves in five of the last six
years, albeit on a downward trend, falling from a peak of £21 million in the
Premier League to £1 million in 2015, compared to £8 million in 2014 (the
difference essentially being the lower parachute payment).

Most revealingly, Wolves generated a total of £53 million EBITDA
during their time in the Premier League, some of which could surely have gone
on improving a defence with the worst record in the division.

Some might think that £1 million of EBITDA is nothing to
write home about, but to place this into context, only three Championship clubs
had a positive EBITDA in 2014/15 (Birmingham City and Rotherham being the
others) with Wolves having the highest. In stark contrast, in the Premier
League only one club (QPR) reported a negative EBITDA, which is testament to
the earning power in the top flight.

Wolves’ revenue in recent years has been essentially a tale
of promotion and relegation. After they were promoted to the Premier League
revenue in 2010 shot up by £42 million to £61 million, but relegation to the
Championship saw revenue in 2013 fall by £29 million to £32 million, somewhat
cushioned by a parachute payment of £16 million.

Surprisingly, revenue actually slightly rose to £33 million
in League One, in 2014 though this was entirely due to the parachute payment
increasing thanks to the new three-year broadcasting deal.

Annual revenue in 2015 was around £34 million (56%) lower
than the last season in the Premier League (£39 million if you consider the
peak revenue for each revenue stream from the time spent in the top flight). As
well as lower TV money, there have also been steep reductions in gate receipts
(30%), due to falling attendances, and commercial income (25%), due to reduced
contractual sponsorship agreements in the lower leagues.

The importance of parachute payments is clear: in the three
years up to 2015, Wolves received £45 million. The last payment was due in 2016
and was worth £10.5 million, giving a total of £56 million for the four-year
cycle.

The lack of a parachute payment in 2016/17 will have a
substantial, adverse impact on Wolves’ finances, as they will have to find £10
million from somewhere – either other revenue streams (unlikely), cost cuts or
player sales.

That’s what makes Wolves’ limited assault on the
Championship last season all the more perplexing. In 2014/15 they enjoyed the
sixth highest revenue of £26 million, only behind Norwich City £52 million,
Fulham £42 million, Cardiff City £40 million, Reading £35 million and Wigan
Athletic £28 million. With that sort of firepower, a play-off place should be a
legitimate aspiration.

Of course, these revenue figures are distorted by the
parachute payments made to those clubs relegated from the Premier League, e.g.
in 2014/15 this was worth £25 million in the first year of relegation.

However, if we were to exclude this disparity, Wolves would
still be in a healthy seventh place and the revenue differentials would be
smaller, albeit they would be behind different clubs, e.g. the top three would
then be Norwich City £29 million, Leeds United £24 million and Brighton and
Hove Albion £24 million.

Following the £9 million reduction in parachute payments in
2014/15, which Purewal described as “quite substantial”, broadcasting now only
accounts for 49% of Wolves revenue (down from 63% the previous season). As a
result, commercial’s share rose from 21% to 30% and match day increased from
16% to 21%.

In the Championship most clubs receive the same annual sum
for TV, regardless of where they finish in the league, amounting to just £4
million of central distributions: £1.7 million from the Football League pool
and a £2.3 million solidarity payment from the Premier League. Wolves secretary
Richard Skirrow admitted, “Without the Sky deal, clubs would be in all sorts of
turmoil.”

However, the clear importance of parachute payments is once
again highlighted in this revenue stream, greatly influencing the top eight
earners, though it should be noted that clubs receiving parachute payments do
not also receive solidarity payments.

However, it should be noted that these payments are not a
panacea, so Middlesbrough secured promotion last season, even though their
broadcasting income of £6.2 million in 2014/15 was less than half of Wolves’
£13 million.

Looking at the television distributions in the top flight,
the massive financial chasm between England’s top two leagues becomes evident
with Premier League clubs receiving between £67 million and £101 million,
compared to the £4 million in the Championship. In other words, it would take a
Championship club more than 15 years to earn the same amount as the bottom
placed club in the Premier League.

The size of the prize goes a long way towards explaining the
loss-making behaviour of many Championship clubs. This is even more the case
with the astonishing new TV deal that starts in 2016/17, which will be worth an
additional £30-50 million a year, to each club depending on where they finish
in the table.

As an example, I have (conservatively) estimated that the
club finishing bottom in the Premier League next season will receive £92
million, which is £87 million more than a Championship club not receiving
parachute payments. There is never a good time for a club to be relegated, but
Wolves dropped out of the top flight at one of the worst times, as the Premier
League has since seen two new blockbuster TV deals come in, and they now risk
being left behind.

Moxey is painfully aware of this, but it does not sound like
it will provoke a change in policy: “This illustrates the massive difference
between being in the Premier League and being in the Championship. We will have
to look at our strategy and think what we can do to improve our chances of
promotion without going bankrupt. How much can you spend and be able to deal
with that outlay if you still don’t get there? There has to be a semblance of
sanity.”

From 2016/17 parachute payments will be higher, though clubs
will only receive these for three seasons after relegation. My estimate is £75
million, based on the percentages advised by the Premier League (year 1 – £35
million, year 2 – £28 million and year 3 – £11 million). Up to now, these have
been worth £65 million over four years: year 1 – £25 million, year 2 – £20
million and £10 million in each of years 3 and 4.

There are some arguments in favour of these payments, namely
that it encourages clubs promoted to the Premier League to invest to compete,
safe in the knowledge that if the worst happens and they do end up relegated at
the end of the season, then there is a safety net. However, they do undoubtedly
create a significant revenue disadvantage in the Championship for many clubs.

Despite rising 7% to £5.6 million, partly due to having one
more home cup fixture, Wolves’ match day income was still in the bottom half of
the table in the Championship. It was far lower than clubs like Norwich City
£10.7 million, Brighton £9.8 million and Leeds United £8.8 million.

This was even though average attendances increased from
20,860 to 22,423 in 2014/15 with the sale of season tickets up 18% to 13,998,
which meant that Wolves had the sixth largest crowds in the Championship, only
behind Derby County, Norwich, Brighton, Leeds United and Nottingham Forest.

However, the 2014/15 increase was something of a blip, as
Wolves’ attendances have been declining since relegation from the Premier
League. In fact, attendances fell again by more than 2,000 to 20,157 in
2015/16. That meant that Wolves have lost more than 8,000 fans since the peak
of 28,366 in 2009/10. That’s a lot of money left on the table right there.

It’s difficult to criticise the fans, who averaged more than
20,000 in League One, including the first 30,000 plus attendance since building
an all-seater stadium in the early 90s. Nevertheless, the season ticket
campaign for 2016/17 has seen a drop in sales, leading Moxey to admit, “We’re
concerned about attendances, of course.”

The club has been pro-active in its pricing strategy, e.g.
2015/16 season tickets were held at the same level as the 2012/13 Championship
season, while 2016/17 prices have again been frozen with reduced costs for children.
The board stated, “We are fully aware of the financial challenges many
supporters face in these difficult times and we are committed to helping fans
to support the team with the most cost effective pricing policies for matches
at Moline.”

Wolves “remain committed to a medium to long term
redevelopment project for the Molineux stadium and its surrounding areas”,
leading to a purchase of a nearby property in 2014/15 to create new parking
spaces.

The club had already developed the Stan Cullis stand into
two tiers for the 2012/13 season, raising capacity to 31,700, though the second
stage, namely the rebuilding of the Steve Bull stand to increase capacity to
36,000, has been indefinitely postponed.

Although investment in a new stadium is usually a sound
move, it is debatable whether it made sense for a club in Wolves’ position,
when the money could have been used to strengthen the squad to give a better
chance to return to the riches of the Premier League.

After rising 16% to £7.8 million, Wolves’ commercial income
was among the largest in the Championship, only behind five clubs: Norwich City
£12.8 million, Leeds United £11.3 million, Brighton £8.9 million, Watford £8.6
million and Derby County £8.5 million. This is perhaps more an indication of
Wolves’ historical strengths, rather than their current status.

There has been some controversy about Money Shop, the new
shirt sponsor from the 2016/17 season for a minimum of three years. Many are unhappy
with the name of a payday lender being on the front of the famous old gold
shirt, though the club has described this as a “significant commercial
agreement”. This deal replaces Silverbug, a provider of IT services, that was
worth “well over six figures”.

In March 2013 Wolves signed a four-year kit supplier deal with
Puma until the end of the 2016/17 season. This is worth £1 million a season
regardless of which division Wolves are in.

The wage bill rose by £1.3 million (8%) from £16.4 million
to £17.7 million, though for an unexplained reason the prior year comparative
has been restated from the £20.5 million included in the 2014 accounts. Either
way, this is considerably lower than the £38 million wages in the Premier
League. As Steve Morgan explained, “You have to cut the cloth when you go
down.”

That has equally applied to the highest paid director,
assumed to be Moxey, whose annual remuneration has fallen from £1.2 million to
£0.5 million – though he has earned a total of £5.5 million in the last seven
years, including £3.5 million in the halcyon days of the Premier League alone.

What is striking is how low the wages were in the top
flight, as Moxey confirmed: “We stayed up for three years on a relatively small
wage bill.” In fact, Wolves were demoted in 2012 with the 17th largest wage
bill in the Premier League, so it was not a major surprise that they ended up
in the relegation zone.

Over that three-year period, Wolves wages to turnover ratio averaged
57%, which is on the low side. That’s fine for clubs with high revenue like
Manchester United and Arsenal, but not for clubs with Wolves’ revenue levels.
However, just to prove that all that glitters is not gold, Wolves went down
from the Championship with the fourth highest wage bill in the division.

In 2014/15 Wolves prudent approach was summed up by their
67% wages to turnover ratio, which was only higher than Rotherham United in the
Championship. Invariably, wages to turnover looks terrible in this division
with no fewer than 10 clubs “boasting” a ratio above 100%, including
Bournemouth 237%, Brentford 178% and Nottingham Forest 170%, so Wolves’ ratio
is strangely low.

In fact, Wolves’ wage bill of £18 million was only the 15th
highest in the Championship, compared to having the 6th highest revenue. To
place this into perspective, their Midlands rivals Nottingham Forest had a wage
bill of £30 million (though admittedly they are not exactly the poster boy of
football finances).

Moxey argued, “We’re trying to be smarter than the other
clubs. We’re outperforming some of them and they are spending so much more than
we are.”

Another way of looking at this is that Wolves had the second
smallest wage bill of those clubs receiving parachute payments, though there is
obviously a difference in the size of those payments depending on when a club
was relegated.

The reduction in Wolves’ parachute payments is clearly a
factor in the club’s thinking, as Purewal confirmed, “That’s why it was
important to move on big earners who were no longer part of the plans.”

That challenge was exacerbated in League One, as there were
no relegation clauses for demotion to that division. There had been 40% cuts
after going down to the Championship, but few envisaged the second drop. That’s
why the club had to discard the so-called “bomb squad”, i.e. under-performing
players on chunky, long-term contracts such as Jamie O’Hara, Roger Johnson,
Stephen Hunt and Kevin Foley.

In a similar way, the 2015/16 wage bill will benefit from
the departure of high earners such as Bakary Sako, Richard Stearman and Sam
Ricketts.

Another aspect of player costs that has decreased is player
amortisation, which is the method that most football clubs use to expense
transfer fees. This has fallen from the peak of £10.2 million in 2013 to £2.4
million in 2015.

As a reminder of how this works, transfer fees are not fully
expensed in the year a player is purchased, but the cost is written-off evenly
over the length of the player’s contract via player amortisation. As an
illustration, if a club were to pay £15 million for a new player with a
five-year contract, the annual expense would only be £3 million (£15 million
divided by 5 years) in player amortisation (on top of wages).

However, Wolves’ financial results have also been influenced
by the £13.6 million of impairment charges they have booked since 2013. This happens
when the directors assess a player’s achievable sales price as less than the
value in the accounts.

Going back to our example, if the player’s value were
assessed as £4 million after 3 years instead of the £6 million in the accounts,
then they would book an impairment charge of £2 million. Impairment could thus
be considered as accelerated player amortisation. It also has the effect of
reducing the annual player amortisation going forward.

As a result, Wolves’ £2.4 million is towards the lower end
of the Championship, significantly surpassed by most other clubs, especially
those relegated from the Premier League in recent times, i.e. Norwich City,
Cardiff City and Fulham.

The other side of that coin is that player values on the
balance sheet have also decreased, falling from £23.0 million in 2012 to £4.2
million in 2015. That is the accounting value in the books, but the actual
market value would be much higher if Wolves were to sell any of its players.

This was explained by Purewal, who said that no value had
been ascribed in the accounts to players who had progressed through the
Academy, such as Dominic Iorfa, Danny Batth and Carl Ikeme, as no transfer fees
had been paid.

Since Morgan bought the club, Wolves’ activity in the
transfer market can be split into three distinct phases. First, little
expenditure in the Championship; then a reasonable outlay in the Premier League
when net spend averaged £12 million a season; finally, a return to net sales
following relegation.

Moxey argued, “We have a massive net purchase of players
under Steve Morgan because of his patronage”, but the figures do not really
bear this out – unless you consider total net purchases of £10 million over
this period to be “massive”.

The chief executive seemed to be nearer the mark earlier
this year, when he admitted, "What we’re not doing is buying Premier
League or top Championship players. We’re not in that position. That’s the
reality. We have only a certain amount of money. Mostly, they came from Leagues
One and Two.”

As a result of the sales of Afobe and Stearman, Wolves actually
had £6 million of net sales over the last two seasons. This meant that they
were comfortably outspent by the likes of Derby County £29 million, Middlesbrough
£23 million and Burnley £14 million. In fact, the two automatically promoted
clubs and the four that qualified for the play-offs filled six of the seven top
places in the net spend league.

Incredibly, Wolves have been in the happy position of having
net funds in seven of the last eight years. Basically, they have no financial
debt, though their cash balance is now down to just £1 million compared to last
year’s £7 million, having been as high as £26 million in 2011. It should be
noted that they also owe other clubs £2 million in transfer fees.

Most Championship clubs carry a lot of debt, with four clubs
having borrowings over £100 million, including Brighton £148 million, Cardiff
City £116 million and Blackburn Rovers £104 million. Bolton Wanderers have not
yet published their 2015 accounts, given their much-publicised problems, but
their debt was a horrific £195 million in 2014.

That said, the vast majority of this debt is provided by
owners and is interest-free, so the amounts paid out by Championship clubs in
interest is a lot less than you might imagine.

The decrease in the cash balance is concerning, with Purewal
sounding a note of caution: “Cash flow is difficult in this business, but we do
have some in hand. We’re not overdrawn. Going forward, depending how the team
does that is, potentially, another story, with the parachute payments
stopping.”

Unfortunately the club accounts do not include a cash flow
statement for 2007/08 (Steve Morgan’s first season), but in the seven years
since we can see how the club has used his £30 million capital injection,
though this was also boosted by £30 million generated from operating activities
and £2 million of interest received.

Around £16 million has gone on net player registrations (£66
million of purchases less £50 million of sales), but the vast majority £35
million has gone on capital expenditure, largely the stadium redevelopment and
the Compton Park Academy (which cost around £10 million including land
acquisition).

Arguably, the real cost of this investment has been Wolves’
place in the Premier League, especially as £14 million of this infrastructure
investment took place after relegation, which has hamstrung any attempt to
return to the top table.

Although grateful for Morgan’s £30 million funding, many
supporters believe that his lack of investment since then has hurt the club’s
prospects. They would look enviously on the money provided by other owners in
the Championship, e.g. Tony Bloom has put in over £200 million at Brighton,
Steve Gibson at least £130 million at Middlesbrough and Matthew Benham £76
million at Brentford.

In any case, Morgan put the club up for sale last October,
also stepping down as chairman. There has been much speculation for his reason
for doing so. It might be as simple as re-assessing his commitment, especially
after a divorce and meeting a new partner, though others believe that he might
be unwilling to put enough money in to fund a genuine promotion campaign,
especially now that the parachute payments have run out.

"I could be happy"

Whatever his reason, finding a new owner can be a lengthy
process, as Moxey explained: “Despite what many people think there are not many
people around with tens of millions that want to buy a football club. So many
clubs are up for sale. So few get sold. They require constant funding to keep
them afloat.”

He added, “We don't just want to sell to anybody. Many of
our older fans remember when this club nearly went out of business. We don't
want a return to those days.”

In the meantime, Wolves are gambling on youth, underpinned
by its Category 1 Academy accreditation status. In fact, Wolves are one of only
23 clubs in the entire country to hold such a licence.

"Coady Island"

The danger, of course, is that the club will have to sell
some of their acclaimed young players to help balance the books. It’s also
asking a lot of these youngsters to achieve the club’s stated objective of
gaining promotion back to the Premier League as soon as possible.

It does look as if a change in ownership might be the best
thing for Wolves. Moxey hinted at this: “We would like new investment if we can
get it. A new owner potentially comes with new investment policies.”Either way, few fans would disagree with the chief
executive’s assertion that, “Ideally, we want to be challenging for promotion
regardless of ownership. I think being in the top six, if at all possible, is a
minimum requirement.”

Praise for The Swiss Ramble

"Blogger of the Year 2013 - It’s testament to the effect that Kieron has had on the blogosphere that so many fans take his word as gospel. Putting to use his career in the world of finance, his insights into balance sheets and simple explanations of complex ideas appeal to the hardcore financial whizz and casual fan alike." - The Football Supporters' Federation